On Consumption Bunching under Campbell-Cochrane Habit Formation
AbstractCampbell and Cochrane (1999) propose a preference specification that can explain a wide variety of asset pricing puzzles such as the high equity premium. They augment the basic power utility function with a time-varying subsistence level, or "habit", which is in the spirit of "catching up with the Joneses" but with a novel nonlinear mapping of consumption into habit. This paper demonstrates a surprising implication of the Campbell-Cochrane preference specification: consumption bunching is desirable.
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Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 337.
Length: 12 pages
Date of creation: 22 Oct 1999
Date of revision:
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More information through EDIRC
Catching-up-with-the-Joneses preferences; habit; consumption bunching;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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- Cochrane, John H. & Campbell, John, 1999.
"By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior,"
3119444, Harvard University Department of Economics.
- John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
- John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
- John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 90(3), pages 356-366, June.
- John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
- Thomas D. Tallarini, Jr. & Harold H. Zhang, 2005.
"External Habit and the Cyclicality of Expected Stock Returns,"
The Journal of Business,
University of Chicago Press, vol. 78(3), pages 1023-1048, May.
- Thomas Tallarini & Harold Zhang, . "External Habit and the Cyclicality of Expected Stock Returns," GSIA Working Papers 1997-26, Carnegie Mellon University, Tepper School of Business.
- Thomas D. Tallarini, Jr. & Harold H. Zhang, 2005. "External habit and the cyclicality of expected stock returns," Finance and Economics Discussion Series 2005-27, Board of Governors of the Federal Reserve System (U.S.).
- Mary C. Daly & Daniel J. Wilson, 2006. "Keeping up with the Joneses and staying ahead of the Smiths: evidence from suicide data," Working Paper Series 2006-12, Federal Reserve Bank of San Francisco.
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